Bank Preferred Stocks – A Good Alternative to Bonds: Bank of America Corp (BAC), Citigroup Inc. (C)

The market is valuing all of these companies as having roughly the same credit worthiness.  This is evident because all of the preferred stocks trade at or just above $25, the par value of the shares.  I think this is justified since all of the banks have to pass stress tests and are under very strict capital rules.  So to choose which company or preferred issuance to buy, it’s best to consider all of the shares the same and look at the price relative to the call value.  Try to pick up issuances that at least break even as long as 1 dividend is paid before the shares are called.

Here are a few examples:

The Bank of America Series J preferred stock currently trades around $25.29.  It pays a fixed quarterly dividend of $0.453, with the next ex-dividend date of April 11.  So as long as the series isn’t called before April 11, investors will earn the dividend.  If the series is called before that date, roughly 1% of the investment is lost.

The Goldman Sachs Series B preferred stock currently trades around $25.30.  It pays a quarterly dividend of $0.388 per share.  The next ex-dividend date is April 23, so as long as the bank doesn’t call the shares before that date, the trade will be marginally profitable.  If the shares are called before that date, just over 1% of the investment is lost.

For investors hunting for a bond alternative, bank preferred shares present a good opportunity for a moderate yield with little to no volatility.

The article Bank Preferred Stocks – A Good Alternative to Bonds originally appeared on Fool.com and is written by Adam Jones.

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